MSF debut: Banks borrowed Rs 100 cr on Friday

Banks on Friday used the Reserve Bank of India's (RBI) marginal standing facility (MSF) for the first time since its inception in May. According to data released by the central bank on Monday, banks borrowed Rs 100 crore for three-day loans through the facility.

To borrow funds through this window, banks have to pay interest at a rate 100 bps higher than the repo rate, which currently stands at 7.25 per cent. Banks are allowed to use MSF only after exhausting the excess statutory liquidity ratio (SLR), which stands at 24 per cent of their net demand and time liabilities. Banks keep excess SLR to pledge securities for funds from the central bank or the overnight market to meet their product needs. In May, MSF had replaced the second liquidity adjustment facility (LAF).

Though RBI did not publish the names of banks that used MSF, according to market players, a few small private sector banks facing a liquidity crunch may have used the facility. “The amount borrowed was very low compared to the LAF borrowing on Friday. Maybe one or two small banks have used the window to sail over short-term needs,” said a treasury head of a large public sector bank. On Friday, banks borrowed around Rs 75,000 crore through the LAF window at 7.25 per cent.

Interestingly, though the call money rate, at 7.30-7.40 per cent, was stable last week, banks opted for MSF funds instead of the call market route. When MSF was announced, RBI had said it expected banks to exhaust all other sources before taking this route.

“Every bank has an internal limit set for borrowing from the call money market. Exhaustion of that limit would have forced a bank to approach RBI's marginal standing facility. Also, while lending call money, factors like the borrowing bank’s net worth, its market standing and its past experience in repaying the debt play major roles, since borrowing in call is non-collateralised,” said Pawan Bajaj, deputy general manager, Bank of India.

Liquidity is expected to remain tight due to the advance tax outflow scheduled later this week. Banks expect Rs 25,000 crore to Rs 30,000 crore to go out of the system owing to the tax outflow. RBI had earlier said the MSF would be tested when the tax outflow takes place.

“Every quarter, it (advance tax) happens. I don't think there is anything different in that. A new type of liquidity management facility has come, so it would be tested,” RBI Deputy Governor K C Chakrabarty had said in the beginning of June.